Market-Driven Growth with Knowledge and Capital as Twin Propellants: An Innovation-Driven Growth Model with Melitz–Finance Microfoundations and Ramsey Policy

We develop an integrated growth model that synthesizes insights from endogenous growth theory, international trade, and financial economics to explain how market-driven mechanisms translate research and development and physical investment into sustained economic expansion. Central to the framework is the concept of an "engine intensity" that captures the efficiency with which economies convert innovation inputs into growth outcomes. We microfound this engine using a heterogeneous-firm framework augmented with financial frictions from credit market imperfections. In the model, knowledge and physical capital serve as twin propellants—non-separable complements in both production and innovation processes. We organize policy interventions through a Ramsey-optimal investment–export–tax mix, expressed in terms of measurable sufficient-statistic gaps: user-cost of capital, real effective exchange rate, and R&D effective marginal tax rate. We establish the existence and local uniqueness of a balanced growth path in knowledge and capital, derive comparative statics that rationalize the empirically observed competition–innovation inverted-U relationship, outline empirical identification strategies using policy-induced variation, and provide closed-form guidance for Ramsey policy weights and cross-term interactions. The framework connects to institutional dimensions of wealth expansion, offering a unified perspective on the co-evolution of knowledge, capital, and institutions in the growth process.